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Countdown to Obamacare: The Penalties for Uninsured Americans

Philip Moeller

Editor's Note: This is part of a continuing series counting down to the Oct. 1 launch for new state health insurance exchanges that have been created to help people find coverage and meet the requirement for mandatory health insurance that takes effect Jan. 1, 2014. See part one "How Will My Health Insurance Change?" and part two "A Consumer's Toolbox."

Effective Jan. 1, 2014, Obamacare requires all eligible individuals, including children, to have health insurance. Failure to be insured can trigger a penalty fee of $95 per adult and $47.50 per child in 2014. If you have individual coverage but your dependent children aren't insured, you can still face penalties on them.

No one knows how many Americans will be without health insurance in 2014. A 2012 estimate by the Congressional Budget Office estimated that about 30 million Americans will not have insurance in 2016, and roughly 6 million of them will face penalties. The penalties for individuals are expected to increase each year, and the uninsured will have to pay either a fee or percent of household income (whichever is greater).

In 2014, the fee is $95 per adult or 1 percent of household income.

In 2015, the fee is $325 per adult or 2 percent of household income.

In 2016, the fee is $695 per adult or 2.5 percent of household income.

The penalties for children are half that for adults. And there is a cap on the penalties, regardless of income, which is the annual cost of a basic health insurance policy on a state health insurance exchange. That ceiling is not likely to be a factor this year, but it could come into play when the penalties get steeper.

To avoid a penalty, you must have health insurance that meets the law's minimum standards for coverage. This "minimum essential coverage" must be offered by any individual insurer or small employer who offers health insurance. It will also be included in most large employer health plans in 2014 and will be mandatory for such plans beginning in 2015. So if you have insurance in 2014, you shouldn't worry about whether you meet the requirement of the law. However, this standard for minimal essential coverage is not met if the policy provides only limited benefits. You can't, for example, get a dental insurance policy and say you've satisfied the law's requirement to have health insurance coverage.

While the penalties may be clear, the rules of who must have insurance can be complicated. When developing guidelines to carry out the law, the government had to consider all the situations in which a person's coverage, employment, marital, dependent status and even family situation might change during a year.

"A lot of people's lives don't fit the cookie-cutter pattern," Karen Pollitz, a senior fellow at the Kaiser Family Foundation, said in a recent conference call. "I think there will be some questions about how do I count my income, or whose income do I count, or who's in my household, and some of those questions will be puzzling for people."

Which individuals must get health insurance in 2014. The Affordable Care Act lists nine categories of individuals who will not be required to have health insurance coverage in 2014. The largest category is low-income Americans who cannot find affordable health insurance coverage.

In most cases, if you don't make enough money to file a federal tax return, you will be exempt from having to get health insurance next year. Whether you file a return or not, the specific affordability threshold is 8 percent of annual income for the cheapest available policy that offers minimum essential coverage. Choosing a so-called "Cadillac" health insurance policy whose premium is above 8 percent of your income won't exempt you from a penalty if you say you can't afford it.

Other reasons for an exemption from the individual mandate include:

Religion, specifically if your religion opposes accepting insurance benefits. The Social Security Administration will manage the recognition process. Members of a recognized health care sharing ministry are also eligible for an exemption.

Federally recognized Indian tribes.

Hardship exemptions are available from state health insurance exchanges.

Citizenship status. The individual mandate only applies to U.S. citizens, U.S. nationals and aliens lawfully present in the U.S.

Inmates in penal institutions are exempt from the individual mandate.

Health insurance coverage gaps of up to three months are allowed and will not violate the individual mandate.

How penalties will be collected. It's not clear how aggressive the government will be in collecting penalties from individuals. The emphasis today is not on enforcing penalties, but rather on convincing people to get insurance, particularly younger and healthier people who have opted to forgo insurance in the past. When enforcement does occur, it will be carried out by the Internal Revenue Service, which will collect 2014 penalties by making adjustments on 2014 individual tax returns that will be due in April 2015.

"The amount of the shared responsibility payment will be included on the annual Form 1040 starting with the 2014 return taxpayers file," Eric Smith, an IRS spokesman, told U.S. News. "It will offset any refund that would otherwise be due or will add to any balance due."

"As is always the case with a tax return," Smith adds, "if there is an amount due, individuals generally pay this amount either by check or by electronic funds transfer. Insurers will be required to provide everyone that they cover each year with information that will help them demonstrate they had coverage beginning with the 2015 tax year."

While the IRS can add an Obamacare penalty to the balance of taxes due, the law does not give the agency power to go after taxpayers who fail to pay the penalties.

Twitter: @PhilMoeller

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